Reinventing LP-GP data exchanges and analytics

Investors want more information about where their money is going and that is putting a strain on fund managers. GPs can gain a competitive advantage from managing these requests effectively, says eFront CEO Tarek Chouman

This article is sponsored by eFront.

The data revolution may have made enormous amounts of information available to GPs and LPs, but it remains a burden to manage. Private Equity International sat down with Tarek Chouman, the CEO of eFront, to find out how technology can lighten the load and what it means for the alternative asset industry when all this data isn’t just accessible, but also understood.

There’s no world where today’s investors start asking for less data, or stop making additional requests beyond that last quarterly report. And by the very nature of the business, as any GP matures, they will grow in size, which means more portfolio companies and more data to manage and report.

That’s where today’s technology platforms step in and automate as much of this data exchange as possible. Software solutions provider eFront has long been on the cutting edge, understanding that managing alternative assets is very much about managing data. Chouman knows the gap between LP expectations and GP capabilities, but believes that technology can make the most of the data that’s already available today to make better decisions.

What’s the current environment for the exchange of data between GPs and LPs?

Tarek Chouman

LPs of all kinds, from sovereign wealth funds to high-net-worth investors to massive institutional investors, are looking to extract more information about where their money is going, especially as they seek additional alpha. They want to better understand performance, risk and benchmarking. It’s happening worldwide, and we think it’s a revolution that’s underway right now.
But that thirst for information is putting a strain on GPs. They can’t provide data in different formats and different ways for each and every LP. So they find themselves either serving their biggest LPs, say the top 10 or 20 percent of their investors, which can immediately frustrate the other 80 or 90 percent, who are not getting the data the way they want.

And this is precisely where we come into the picture. Because we are able to provide the tools that are going to allow them to automate, optimise and streamline this data exchange, even as the amount of data for any GP to manage grows steadily. And I’d argue that any GP’s ability to manage their data can become a competitive advantage. This isn’t just about investor reporting per se, it’s about securing the commitments to the new fund.

We have heard that LPs value fast, accurate reporting. Is that the advantage?

It’s more fundamental than that. Data can serve as a reality check, and can help differentiate one manager from another. This isn’t about better service, though that’s important. It’s about LPs using more robust data to select managers through sophisticated analysis powered by the latest technologies.

How can investors chose a manager when the managers are all telling the same story?

When they refer to themselves as top quartile, what is that based on? Data can substantiate these claims, and our latest offering Insight can help LPs see where a GP sits and where its true source of value creation lies. Granular data that used to sit buried in a manager’s Excel spreadsheet is now accessible to LPs, more than ever before. Investors often have to pay steep fees to advisors to get this kind of intel, and now it’s readily available. And given that most LPs are constrained in terms of resources, these platforms can make a massive difference.

Has there been any pushback from GPs on making that information, once hidden in Excel, more available to LPs?

We sit between GPs and LPs, so we’re clearly sensitive to the needs and priorities of fund managers. But we believe that today’s private market players have nothing to hide, and nothing to be shy about. On the contrary, disclosing that track record is going to draw more attention, and win more fans, which naturally means more commitments. Unless a manager is failing, we see no threat from transparency. On the contrary, we believe open books can mean full coffers.

Because data isn’t just a tool for LPs looking to vet managers. It can help a GP stand out from their peers, by backing up their track record. That smaller manager in China might be able to catch the attention of a large pension fund in California by a data-rich testament to their own performance. The level of data out there today is a reality check, but if a manager is an actual contender, it can make them look better, and rightfully so.

How does a firm like eFront balance the appetite for so much data, with the need to ensure that data is secure?

We operate on a trust-based relationship with our clients, so data security is one of our highest priorities. We leveraged our 20 years of experience when designing our system, with penetration tests, strict governance over access rights, and secure hosting capabilities with the right level of confidentiality every step of the way. It’s vital to our business to protect a client’s data and their relationships.

How can LPs make sense of all the data they are increasingly having access to?

Digitalising and enhancing data exchanges between LPs and GPs is not the endgame. The main purpose is to enable superior, more sophisticated analysis that will bring some more factual reasoning into the alternative investment decision-making process. The mere benchmarking of performance through skewed industry benchmarks will soon be insufficient for an LP to measure performance. LPs are keen to get to the bottom of the true sources of value creation of their managers, down to asset and individual partner level. To achieve that level of sophistication, they need to combine multiple and granular data sets into a powerful analytical tool. This is precisely what we offer with our recently launched eFront Insight solution. GPs are as interested as LPs in accessing this level of analytical capabilities to perform some self-assessment. We are proposing the same analytical platform to our GPs who contribute their data – and they are genuinely learning so much about themselves.

Where do you see the industry going from here?

In the last 15 years, the pace of change has been staggering. Just three years ago, we started our eFront Data Intelligence offering dedicated to facilitating the exchange of data between LPs and GPs before anyone was talking about that. However, as much as we invest in our future, LPs are going to drive the next generation of innovations. They’re beginning to see the potential for not just more data, but data they can process at an accelerated pace to make better decisions. They can pool their data requests through a platform like ours and get what they need to improve their manager selection, no matter the size of their commitment. In that respect, initiatives such as those driven by ILPA to harmonise data requirements from LPs are positive catalysts.

Although, this isn’t just about making LPs savvier. The enhanced ability to measure risk and performance and factually assess investment opportunities is going to make more investors willing to invest in private markets, which are still a very small part of the financial industry in terms of AUM. Better transparency has the potential to grow private markets in the future, and that’s what excites us about our business.